I just finished this
altered frame last weekend using Tim Holtz crackle paint.
I started with a $1 oval wood frame from Michaels. Base-coated it with one coat of acrylic paint in an off white. After that was dry, I brushed on the crackle paint, not being too neat, not worrying about brush marks, and not painting as thin a coat as I did with the acrylic. In fact, the layer of crackle paint should be thicker than you'd normally do for regular paint.
I've been told that if I had painted it on even thicker, the cracks would have been even larger. But I like the smaller cracks that look like the crazing in an old piece of china.
I'm not sure you should have tried thinning the crackle paint with water.